5/10/2004 @ 12:00AM

Prozac Hangover

Eli Lilly’s Sidney Taurel got whacked when .generics pushed Prozac off the shelf. So far not much has shown up to replace it.

How depressing. Investors who bought Eli Lilly stock when Sidney Taurel took over as chief executive in 1998 have earned just 3% a year, less than half the return of the average pharmaceutical company. Taurel in the meantime has enjoyed a generous average annual compensation of $12.8 million. And that’s including the year 2002, when, with his employees enduring a wage freeze, Taurel voluntarily gave up the salary portion of his compensation. He did not give up his options–350,000 in each of the past two years. (Those options had a combined theoretical value at issuance of $16.5 million, but the compensation figures in this survey count options only when they are cashed in.)

For this accomplishment in fat pay and thin shareholder returns, Taurel, 55, has ended near the bottom of our ranking of 194 executives in performance relative to pay. His is largely the story of the depression drug Prozac and how the company failed to find another blockbuster before it lost its patent protection to a generic drugmaker. This year a similar disaster awaits as competitors target Zyprexa, a schizophrenia drug that means more to Lilly’s revenue stream than Prozac did when Lilly lost its patent. The company believes that it can not only defend Zyprexa but also bring several new drugs to market that will drive profits and stock prices. At least its erectile dysfunction drug is off to a good start (see “Make War, Not Love“).

Lilly was strong at the time Taurel took over. It had been riding Prozac since 1987, with profits peaking at $3 billion in 2000. Then, in 2001, two years before anticipated, generic-drug manufacturer Barr Pharmaceuticals wrested Lilly’s Prozac patent away. Lilly lost 90% of its Prozac prescriptions over a year and $35 billion of its market value in a single day. The stock still trades 30% below its Prozac high. Lilly’s profits dropped 9% between 2001 and 2003, to $2.5 billion. Dr. Reddy’s Laboratories, a generic druggist, is hoping to repeat history by wresting away Lilly’s patent on Zyprexa. A lawsuit is pending.

Taurel is looking hard for the next big medicine. Research and development costs last year were $2.4 billion, or 19% of sales, making Lilly’s R&D ratio among the highest in the industry. It has five new products in the market and two more coming out this year, including the psychiatric drug Cymbalta. This chemical may or may not relieve the depression in Lilly’s earnings.